On Wednesday, the Fed re-committed to normalizing policy by raising interest rates. In the Fed's press conference, Fed Chair Jay Powell emphasized the importance of restoring the inflation rate to their target rate of 2%.
A series of rate hikes starting in May will lift banks' net interest margins and bolster the group's earnings. Bank of America (BAC) has high rate sensitivity and stands to benefit significantly from a rate hiking cycle. In a difficult investing year, Bank of America has the wind at its back to perform well.
Since the financial crisis, Bank of America has been one of the most consistently performing large banks. Like clockwork, the bank's deposits, customers, and earnings have been growing steadily year in and year out. The bank produces vast cash flow and has been returning the cash to shareholders mainly through stock buybacks.
The bank's shares outstanding have steadily decreased from 11.2 billion in 2015 to 8.3 billion today, a 27% reduction. This year the bank will return over $40 billion to shareholders through a dividend that's yielding 1.9% and continued buybacks.
Last week, Bank of America posted the best year in the company's earnings history and solid results for the quarter. Asset quality is high and credit card losses are half of the pre-pandemic levels.
CEO Brian Moynihan projects strong loan growth this year and flat expenses compared with last year, which should continue the positive operating leverage the bank has shown. The fourth quarter represented the strongest quarter of organic loan growth of the year.
The bank is seeing faster loan and deposit growth while keeping credit costs in check. Plus, investments in digital banking have produced an efficiency edge with growing usage.
Retail investors have flocked to Merrill Edge, opening over a half-million accounts in the last quarter with an average account value of $70 thousand. The remarkable asset gathering at Merrill Lynch gives the bank a leg up on the competition along with a slight premium valuation.
In some respects, Bank of America's business performs with the consistency of Apple (AAPL) , with massive cash flow generation and large buybacks. There's probably no coincidence that Berkshire Hathaway (BRK.A) (BRK.B) owns about a 12% stake in Bank of America, their second-largest position behind Apple. It's a vote of confidence in management and the valuation.
Unlike Wells Fargo (WFC) , which Berkshire has mostly divested, BofA has remained mostly scandal-free since the financial crisis, completely restoring its tarnished reputation from that period. Even the poorly timed Merrill Lynch takeover has proved its worth; of course, they will never be redeemed for the poor due diligence of the ill-conceived purchase of Countrywide Financial.
While buying shares of Bank of America is far from early, the valuation is still reasonable at a 12 P/E. With a rate-hiking cycle from the Fed, strong earnings will help the stock to continue to perform well.
Owning the most consistently performing bank, with catalysts for strong earnings growth, will help smooth out any portfolio in a choppy year.
